World Kinect Corp (WKC) 2011 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the World Fuel Services 2011 Second Quarter Earnings Call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the webcast over to Mr. Frank Shea, Executive Vice President and Chief Risk and Administrative Officer. Mr. Shea, you may begin your conference.

Good evening everyone, and welcome to the World Fuel Services Second Quarter 2010 Conference all. I'm Frank Shea, Executive Vice President and Chief Risk and Administrative Officer, and will be doing the introductions on this evening's call with, as we have been doing in recent quarters, a live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit our website, www.WFSCorp.com and click on the website icon.

With us on the call today are Paul Stebbins, Chairman and Chief Executive Officer; Michael Kasbar, President and Chief Operating Officer; Ira Birns, Executive Vice President and Chief Financial Officer, and Paul Nobel, Senior Vice President and Chief Accounting Officer.

By now, you should have all received a copy of our earnings release. If not, you can access our release on our website.

Before we get started, I would like to review World Fuel's Safe Harbor Statement. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding World Fuel's future plans and expected performance, are forward-looking statements that are based on assumptions that management believes are reasonable, but are subject to a range of uncertainties and risks that could cause World Fuel's actual results to differ materially from the forward-looking information. A summary of some of the risk factors that could cause results to materially differ from our projections can be found in our Form 10-K for the year ended December 31, 2010, and other reports filed with the Securities and Exchange Commission.

We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period. At this time, I would like to introduce our Chairman and Chief Executive Officer, Paul Stebbins.

Thank you, Frank, and good evening. We appreciate you joining us tonight. Today, we announced record earnings of $50 million, or $0.70 per diluted share, for the second quarter of fiscal 2011. Volume and profitability were robust across all three segments, with significant increases over Q1 in the contribution from our Marine and Land businesses. Key performance metrics also improved as we achieved a 16% return on equity and a 17% return on invested capital.

Our balance sheet remained strong, while our cash and overall liquidity positions were very healthy, leaving us well positioned to fund growth.

This quarterly result demonstrated once again the strength and durability of our business model in a wide range of operating environments. It also underscored the importance of having a clear, clean strategy and sticking to it. Our investments in people, process, and technology, as well as our continued focus on risk management, execution, and service excellence, have served us well and we are excited about the prospects for further expansion of our business.

Our Aviation team delivered another strong quarter, with solid performance across the spectrum of commercial, business, and government activity. And despite the negative impact of high fuel prices on overall airline profitability, and the continued uncertainty around utilization in a tough economy, our customers are generally doing well. The hard work done by the industry during the crisis of 2008 has paid off, and most airlines are better positioned now to navigate the uncertainties of the on-again, off-again recovery in the economy.

As we look forward, we expect further expansion in our core commercial and business aviation markets. We are excited about our evolving capabilities with supply and the continued refinement of value-added services to our Aviation customers.

Our Marine segment posted an increase in volume and achieved its highest quarterly gross profits since Q4 of 2008. Despite a very challenging operating environment for the global shipping industry, our team achieved a great result in our core business. Targeted marketing initiatives, disciplined risk management, and a cultural commitment to excellence in service and execution continued to differentiate our offering.

In this difficult market, there is significant pressure throughout the industry to cut costs and drive efficiencies. Our performance reflects the success we had in helping our customers and supply partners reduce risk, manage exposure, and generate savings. Counter-party risk, fuel quality, access to credit, and price volatility remain key concerns for the industry and we continue to add significant value in all these areas. As the global economy continues to sort itself out, we will remain focused on providing financial, technical, logistical, and operational support to our customers and suppliers worldwide.

Our Land fuels business had a record quarter. The business has developed more organizational maturity and the segment is beginning to achieve performance metrics more in line with our legacy Marine and Aviation businesses. These are exciting developments. As we have said before, the overall land fuels market is significantly larger than the marine and aviation spaces combined, and we see opportunities to continue to grow and scale this business both domestically and internationally.

At a more strategic level, we continue to see the importance of using technology to drive value creation and efficiencies in all of our business segments and we will continue to invest in this area. Moreover, our business development function continues to mature, and it is clear that our strong balance sheet and liquidity position continue to be important differentiators in today's economic environment.

After our last call, some of you commented that our assessment of the global outlook was a bit somber in tone. Our intention was not to project undue concern but to convey a clear-eyed appreciation for the realities we see in the global market. The pace of growth in China and India, political changes in the Middle East, and Europe's efforts to address sovereign debt all impact trade and confidence in the global economy.

And in the US, Congress may have proven in the last 24 hours that Churchill was right when he said, America can always be counted on to do the right thing, but only after exhausting every other possibility. As the US works towards a more durable economic recovery, we hope this agreement clears the way for more productive work on job creation, tax reform, and industrial policy.

Despite the challenge of a fast-changing world, we remain optimistic about our prospects for continued growth and transformation at World Fuel. As we have proven over the years, challenging market environments create opportunities for those who are prepared and strategically focused.

Thank you for your continued support. I'll now turn the call over to Ira for a detailed review of the financials.

Thank you, Paul, and good afternoon, everybody. For the second consecutive quarter, I am pleased to announce that we reported the highest level of quarterly profits in Company history. As we remain focused on our strategy and risk management disciplines, the diversity of our business model continues to prove that we can profitably grow the business across all of our segments despite continued global economic uncertainty. On behalf of the entire executive team, I would like to thank our employees all over the world for contributing to another record quarter.

And now, the financial overview. Consolidated revenue for the second quarter was $8.7 billion, up 23% sequentially and up 98% compared to the second quarter of last year. The sequential and year-over-year changes in revenue were impacted by a more than 10% increase in average fuel prices sequentially, and a more than 40% increase in average fuel prices from the second quarter of 2010.

The Aviation segment generated revenues of $3.4 billion, up $718 million, or 27% sequentially, and double the revenue generated in the second quarter of last year. Approximately 60% of the year-over-year increase was a result of higher average fuel prices, and the remainder was a result of increased volume.

Our Marine segment revenues were $3.5 billion, up $534 million, or 18%, sequentially and up $1.3 billion, or 55%, year-over-year. Approximately 83% of the year-over-year increase was the result of higher average fuel prices and the remainder was the result of increased volume.

And finally, the Land segment generated revenues of $1.8 billion, up $378 million, or 26%, sequentially and up $1.4 billion, or more than four times the revenue generated in the second quarter of last year. Approximately 62% of the year-over-year increase was due to the increase in volume attributable to recent acquisitions as well as organic growth initiatives, and the remainder was the result of higher average fuel prices.

Our volume metrics increased across all three of our segments in the second quarter. The Aviation segment sold 961 million gallons of fuel during the second quarter; that's up 12% sequentially and 39% year over year, representing record quarterly volume and the ninth consecutive quarter of sequential volume growth in the Aviation segment.

The sequential growth in Aviation volume was principally driven by increases in our commercial passenger, cargo, and government businesses as well as increases in our general aviation business, including the additional volume from the Ascent acquisition, which closed at the beginning of April. Our annualized Aviation volume is now approaching 4 billion gallons, nearly 2.5 times the volume generated at the trough in the market in the first quarter of 2009.

Our Marine segment's total volume for the second quarter was 6.3 million metric tons, up 5% from last quarter and up 2% year over year. The 5% sequential growth in volume represents the highest level of sequential growth we have seen in a year, and the highest level of quarterly volume since the fourth quarter of 2008. Fuel reselling activities constituted approximately 85% of total Marine business activity in the quarter, consistent with the past several quarters.

And finally, our Land segment sold a record 569 million gallons during the second quarter, up 9% sequentially and triple the volume sold in last year's second quarter. The year-over-year increase was driven by both organic growth initiatives as well as the acquisitions of Lakeside and Western, which were not included in our second quarter results last year.

Consolidated gross profit for the second quarter was a record $165 million, an increase of $28 million, or 21%, sequentially and $58 million, or 54%, compared to the second quarter of last year.

Our Aviation segment contributed a record $82 million in gross profit, an increase of $12 million, or 17% sequentially, and $29 million, or 55%, compared to the second quarter of 2010. Our [sell] supply models jet fuel inventory position was approximately 55 million gallons, or $163 million, at the end of the second quarter, up from 53 million gallons and $161 million at the end of the first quarter. While fuel prices were lower at the end of the second quarter versus the first quarter, average fuel prices were actually 9% to 10% higher during the second quarter.

We again realized a gross profit benefit as a result of the volatility and timing of jet fuel price movements during the quarter. The amount of such benefit was similar to the gain realized last quarter.

The Marine segment generated gross profit of $51 million, an increase of $10 million, or 26% sequentially, and an increase of $7 million, or 17%, year over year. This represents the highest level of gross profit since December of 2008. While the marine markets clearly remain choppy and difficult to predict, we are encouraged by the Marine segment's results this quarter, and remain dedicated to driving continued growth in the Marine segment.

Our Land segment delivered a record level of gross profit of $32 million in the second quarter. That's up $6 million, or 23% sequentially, and $21 million, or 182%, year over year. The organic and acquisition-related growth initiatives that we have implemented have resulted in a quarterly gross profit result that is almost triple the amount achieved just one year ago in the second quarter of 2010. Land contributed nearly 20% of our consolidated gross profit this quarter as compared to only 9% in the second quarter of 2010, demonstrating the fact that our Land segment is very quickly becoming a more meaningful portion of our overall business.

Operating expenses, excluding bad debt expense, were $95 million, up $15 million sequentially and $35 million compared to the second quarter of last year. Our expenses were above the high end of the range I provided on our last call, primarily due to costs associated with the significant sequential increase in gross profit. Looking at operating expenses excluding bad debt as a percentage of gross profit, we actually saw a decrease from 58.8% in the first quarter to 57.8% in the second quarter.

Also, as I mentioned on the past few calls, due to our increased level of acquisition activity, our operating expenses now include an increasing amount of amortization of acquired intangible assets. Intangible amortization included in the $95 million of operating expenses in the second quarter was $7 million; that's up from $4.9 million in the first quarter and only $2 million in the second quarter of last year.

Most of the sequential increase relates to the NCS acquisition, which was completed in March. Operating expenses excluding the amortization of acquired intangible assets and bad debt, as a percentage of gross profit, was 53.6% for the quarter, down from 55.2% last quarter and 54.7% in the second quarter of last year.

For modeling purposes, I would assume overall operating expenses, excluding bad debt expense, of approximately $93 million to $95 million in the third quarter.

Our total accounts receivable balance was just under $2 billion at quarter end, up approximately $90 million from the first quarter due to the increase in average fuel prices as well as the increase in volume across all three business segments.

Our bad debt provision in the second quarter was $3.5 million, up $2.7 million compared to last quarter, and up $1.8 million compared to the second quarter of 2010. Our total reserve in the second quarter was $22.7 million, up from $20.4 million in the first quarter. We remain conservative in our risk management disciplines and we remain confident that our accounts receivable reserve is adequate.

Consolidated income from operations for the second quarter was $66 million, an increase of $11 million, or 19% sequentially, and $21 million, or 47%, year over year. For the quarter, income from operations for our Aviation segment was $38 million, down $500,000, or 1% sequentially, but up $9 million, or 31%, compared to the second quarter of last year.

Our Marine segment's income from operations was $26 million for the second quarter. That's an increase of $8 million, or 49% sequentially, and $2 million, or 8%, year over year.

Our Land segment generated another record level of income from operations of $14 million, up $3 million, or 32% sequentially, and up nearly eight times the level of operating income generated in the second quarter of 2010.

The Company had $4.4 million of non-operating expenses, which consist primarily of interest expense and other financing costs. I would assume net interest expense to be approximately $3.5 million to $4.5 million for the third quarter of this year. As always, this excludes any potential foreign exchange impact on our results.

The Company's effective tax rate for the second quarter was 18%, down from 20% in the first quarter and up from 17% in the second quarter of 2010. Our second quarter rate came in below the range that I provided on last quarter's call due to the sharp increase in profitability generated in jurisdictions with lower tax rates -- most specifically, in our Marine segment. We estimate that our effective tax rate for the third quarter of 2011 should be between 18% and 20%.

Our net income for the second quarter was $50.2 million, an increase of $9 million, or 22%, over the first quarter and an increase of $13.2 million, or 36%, year over year. Non-GAAP net income, which excludes the amortization of acquisition-related identified intangible assets and stock-based compensation, was $57.7 million in the second quarter, increasing $10.9 million, or 23% sequentially; and $17.5 million, or 44%, year over year.

Diluted earnings per share for the second quarter was a record $0.70, an increase of 21% sequentially and 15% year over year. Non-GAAP diluted earnings per share was $0.81 in the second quarter, an increase of 23% both sequentially and year over year. As a reminder, the year-over-year earnings per share comparisons were affected by the diluted impact of our secondary equity offering, which we completed in the third quarter of last year.

Total diluted shares for the second quarter were 71.6 million shares.

Our return on invested capital was 17% in the second quarter. That's up from 15% last quarter, representing our highest return since the second quarter of 2010. Our returns continue to be well in excess of our cost of capital, and we are pleased to see our return on invested capital rebound from the diluted impact of last year's equity offering.

Our overall net trade cycle increased by 0.2 of a day sequentially to 8.8 days, primarily driven by the NCS acquisition. Excluding NCS, which operates at a much longer trade cycle, our net trade cycle was 8.3 days, flat with the first quarter. Our return on working capital in the second quarter was just below the 35% generated last quarter, impacted principally by rising fuel prices during the quarter.

Cash flow from operations was a positive $7 million in the quarter, benefiting from the decline in fuel prices at the end of the second quarter when compared to the end of March.

Cash increased from $93 million at the end of March to $150 million at the end of the second quarter, while debt also increased, from $82 million in the first quarter to $183 million in the second quarter. Therefore, our net debt position at the end of the second quarter was $33 million, as compared to a net cash position of $12 million in the first quarter. This change is primarily attributable to the Ascent acquisition, which was completed at the beginning of April.

As announced today, we recently amended and restated our existing $800 million credit facility, which reduced the [commitancy] and borrowing spread and extended the maturity date of the facility to July 2016. We also added a $250 million term loan, which was funded last week at an initial rate of approximately 2%. The term loan will also mature in 2016, with some modest amortization in 2012 through 2015. The proceeds of the term loan further improves our liquidity profile, providing more capital available to support organic growth and strategic investment opportunities.

In closing, we posted record quarterly earnings and increased our return on invested capital. We remain focused on our strategy, risk management disciplines, and the diversity of our business model while continuing to prove that we can profitably grow the business across all of our segments.

And finally, the new $250 million five-year term loan demonstrates both our ability and willingness to utilize multiple sources of capital to fund our growth.

And now, I'd like to turn the call back over to the operator to open up the call to questions and answers.

(OPERATOR INSTRUCTIONS)

Greg Lewis, Credit Suisse.

Thank you, good afternoon.

Hi, Greg.

Hi, Greg.

Paul, could you provide a little bit more color on what was driving the increase in volumes and sort of improvements in margins in the Marine business? It looked like that had a real good second quarter after what was definitely a challenging first quarter.

Yes, I think the team just did a hell of a job. I mean, as you know -- you cover the transportation sector -- shipping has been challenged and you've got kind of a global backdrop of a little bit of uncertainty. So in markets like that, we tend to view those as also opportunities because it focuses everybody's thoughts. Our strategy over the last several years has been to focus on the large global fleets that basically appreciate the value add. In a market where there's a lot of anxiety still about counter-party risk, there's a lot of anxiety about the supply volatility, we represent kind of a safe harbor in a market that has been confused, at best, for the procurement world.

So I would say that we benefit from that general trend, whether it's kind of a flight to quality. We represent kind of the transparent balance sheet, the global footprint, deep penetration in these markets, and I think we saw some increases in volume reflecting a sense that we represent a really good place to be buying fuel.

On the supply side, that market continues to change. There's a lot of -- the price of oil's up, suppliers are looking for our balance sheet to be sort of the prophylactic, the good protection, in a difficult market. So again, I would say that in a flight to quality, we represent a tremendous go-to-market channel for these oil companies that are re-thinking how they want to access the market.

So yes, those major macro backdrops along with tight execution, a real focus on tight marketing, continuation of risk management discipline, our expertise and very discrete understanding of markets -- and you put that all together and I think the team just did a hell of a job in a not-so-easy market.

Okay, great. And just to sort of tie that in, Ira, when you talked about the effective tax rate of 18% to 20%, it looked like the 18% in Q2 was driven by improvements in the Marine business. Is that sort of what we should think about? In other words, if we think it's going to be continued strong Marine, it's going to be closer to the 18%; and if there's a weakness in Marine, maybe that pushes up to 20%. Is that kind of how we should think about that?

I think it's fair. I mean, there are a lot of factors that drive the tax rate, but certainly, of our three segments, just because of the demographics of Marine over all, Marine would carry the lowest average tax rate. Aviation and Land would be more heavily US and they'd be more focused, more tilted, toward the higher level. So you could always use those assumptions in your modeling, depending upon where you model the results of each business.

Okay, great. And then, just one final question. In thinking about the bad debt expense, that take on business second quarter, I guess if you could provide some color into what segments were driving the pick-up in bad debt expense.

And then, maybe as we think about either the back half of the year or even the third quarter, just given the economic environment we're in with higher oil prices, if you could sort of maybe provide some color or maybe some insights into how you're thinking about how that might look in the back half of the year.

Okay, so the first half of the question, the principal driver of the bad debt expense on a consolidated basis this quarter was Aviation, and that was impacted by a few things. A couple of specific reserves for a couple of accounts around the world, a higher overall receivables balance, and just the general mix in the overall portfolio of business -- all three of those combined resulted in bad debt expense, which was a bit more than the average quarter for Aviation. Land probably had a bit more than it normally does, but that number wasn't anything overly material; we also had a couple of specific reserves there.

In terms of the second half of the year, I can't give you a forecast. I can tell you that we've got 75 to 80 risk management professionals that are focused on our $2 billion receivables portfolio day in and day out. They've done a great job historically and we have no reason to believe that they won't continue to do a great job. We'll always have some bad debt expense but it's difficult to tell you what number to model for the second half of the year.

Okay, guys, great; thank you for the time.

Thanks, Greg.

Ken Hoexter, Bank of America.

Hey, Ken.

Hey, good afternoon. You mentioned you're growing the ground, Ira, where it's becoming a larger and larger portion of the business -- it's not the new segment anymore. When you think about returns on the three segments -- Marine, Aviation, Land -- and you look at future acquisitions, how do you differentiate on a return basis on the investments in the three segments? Where do you see the highest return?

I would take a stab at that first, Ken. I would say that we look at opportunities across all three segments and I think it's hard to say that one segment's always going to come forth with the highest return. I think there are return opportunities that are acceptable to us and I think would be acceptable to you guys in Land, Aviation, and Marine.

Land obviously had a lower return compared to Aviation and Marine for existing business just because of the fact that it didn't have scale. But you could see that over the past three quarters specifically, they caught up dramatically and they're now approaching the levels of Aviation and Marine, and we've achieved that within a very short period of time.

Ken, it's Paul. I would just add -- strategy's very important here. So again, Mike and I come from a tradition of being business-builders. So there's always a certain degree of investment up front to make sure that you build enough critical mass to become a meaningful participant. And I think that that was something the we had to sort of endure for a couple of years with the Land as we got that thing from being a de novo operation to a much more robust part of the overall mix.

So from our perspective, you have to have kind of a vision of what role we're going to play. I think, as we've talked about over the last couple of years, it was very clear to us that in the macro backdrop, the strategy of moving across the barrel was very, very important to our relationship with oil companies and we also had a value proposition that was transferable from our core legacy expertise in Aviation/Marine and would resonate in Land.

So it required that investment, but I think now we're very pleased to see that the return levels are beginning to kick in and assume more historical levels. And I think that we see continued opportunity in all three segments to continue to invest.

Wonderful. When you look at the gyrations in the market, particularly lately, and you think back to what you went through the last time we saw the economy slow down -- and oil ran up last time while it's tapering off a little bit now -- what do you look for in terms of gross profit per gallon? Should we expect to see the [desire to] use your balance sheet to bring up those gross profit margin?

Yes, we don't give any specifics on that, as you know, in terms of a predictive. But I would say that if you go back to -- if you're referring to 2008, as you know, that was the best year we'd ever had in the history of the Company at that time, at a time when everybody else was sort of falling off the cliff. And I think this is where the combination of having a very powerful global platform, good execution skills, the strong balance sheet -- all of that ability to put the -- having a great liquidity position, we can put working capital into the model and still get good returns. I think we feel very comfortable in our ability to navigate these markets.

I think it's something that we've sort of proven and tested. So from our point of view, a little bit of what you refer to as the volatility, the upheaval, lack of clarity -- is the economy coming? Going? Which way? Is it up or down? What's going to happen in global trade? I think we've demonstrated time and again that we have a model that works pretty effectively in navigating that. And again, we end up being sort of the safe harbor in the middle of the storm for both the customer and supply side. So we feel pretty good about our ability to navigate that.

And just to add to Paul's comments, I think as we've said before, we don't focus maybe as much as you guys do in terms of the margin per ton or the margin per gallon. Our focus is on how we continue to grow gross profit dollars.

But if you look at this quarter, on a year-over-year basis Aviation gross profit dollars were up 55% year over year. Marine, even in the weak environment that we've seen, is up 17% year over year and Land is up almost 200% year over year. So that's the metric that we focus on the most. If the margin shifts around a bit because of mix, so be it so long as we continue to grow that number of net revenue over time.

That makes sense, Ira. During the last downturn, you guys moved to kind of shorten some day sales outstanding to particularly exposed customers. What's your thought on that based on what we're seeing in the economy? Have you already started to do some of that?

I would say that we focus on that just as much as we did a couple of years back. Of course, we have a different mix of business that we did in 2008. One of the examples I gave on the call was NTS, which is only part of our government business. So there you are contributing to the trade cycle at higher levels, so would move that needle up a bit. But we're constantly focusing on how to achieve -- we talk about return on working capital on the call; that's important to us. And one of the drivers there is obviously the net investment in working capital.

So that's looked at on a transaction-by-transaction basis, and as long as we're getting the returns that we're comfortable with and growing gross profit, if that number moves up or down by a day or two and we've got the capital and liquidity on the balance sheet to support that, we're fine with that. I think what we proved back in 2008 was where our liquidity may have been getting a little bit tighter and we needed to manage that more closely, we were able to turn the dials and reduce the trade cycle even further for a period of time and generate a tremendous amount of cash. But otherwise, we're really focused more on the return on a day-to-day basis.

Lastly, let me just wrap up on the growth in terms of when I look at -- I guess gross revenue is tied to the price of oil. But I guess when we look at volumes, with the 2% Marine, 39 at Aviation, and tripling at Land. If you were to exclude the acquisition-related impact of the growth rates and look at organic growth rates intra-quarter, how would that have progressed in terms of economically? Would we have seen -- did you see a rate slowing as we moved through the quarter? Just want to understand where you think we are now in terms of that gross rate.

You're referring to -- I'm not sure I completely got the question. You're referring to the slowing during the second quarter? And asking us to comment on that?

Yes, I wanted to understand where you exited the quarter and what maybe July looks like in terms of volume growth organically if we exclude acquisitions.

I would say from a volume standpoint, we usually don't get that granular. I don't think there were any massive gyrations over the course of the quarter from a volume perspective.

So you're saying you didn't see any slowing as the quarter moved on into the end of the quarter?

No.

Okay. And are you able to comment on July experience at this point?

No, we normally don't do that.

Okay, thanks for the time.

Alex Brand, SunTrust Robinson.

Good evening, guys.

How you doing?

Good. I just want to pick up on where Ken left off. I'd like to go up a little higher -- 50,000 feet. Because Paul, you said you didn't mean to be so negative last quarter. As you're a few months later now, has the world, in your view, changed a whole lot one way or another? I guess everyone appears to be assuming that it's gotten a lot worse. What's your experience?

I think what we had last conference call and I was accused of being pretty somber, I think it was important to convey to our shareholders that we have a very realistic and sort of clear-eyed view of just how challenging the global environment is.

And while there was a lot of talk at that time about how nifty the global recovery was going to be and whatever, I think that we saw some deeper systemic issues that were challenging, not only for this country but for the world. Europe still had a lot of uncertainty around the sovereign debt, you had a lot of issues with maturity [towers] and the banks -- what if the central banks get into trouble in Europe and what is that going to mean for the bonds that are being held by various banks? You have issues with China possibly slowing inflation. You had kind of a lot of anxiety about what was going to happen with global trade.

And of course, there was this ongoing uncertainty about whether the United States would address the deficit -- the debt ceiling -- as well as a longer-term issue around our national debt.

So when you take that overall backdrop, it certainly was compressing confidence in the economy. And if the economy maintains slow and you have a lot of uncertainty around things like industrial policy and tax rate, and business investment is not there, you're not going to see jobs, you're not going to see consumption, you're not going to see trade, and that will ultimately impact our customers; that impacts our volume. So we just sort of take a realistic view about all that.

I would say that throughout this quarter, what we demonstrated is that in that kind of a market environment, we end up being a safe harbor, where people are looking to us as a good place to be doing business with a lot of this uncertainty because of the transparency of our balance sheet, the strength of our global distribution platform. I would say we benefited in this uncertain market and that was gratifying for us. That was a thesis that we believed in but we had to be tested, and I would say Q2 gave us a great deal of confidence that that's the case.

Going forward, I would just say that I have the same visibility that all of you have. Okay, we solved the 11th hour, this crisis in the US, but we all know that we have deeper systemic issues that still need to be addressed. I don't know what the outcome of that is going to be and what that will do in terms of the engine of economy from the US. What's China really going to do? What's India really going to do? How would I know?

I would just know that our business model is well designed to be flexible and adaptive, and we tend to navigate pretty well in these environments. So I think Q2 was a real test for us and we felt pretty validated by our ability to execute well in that kind of environment.

When I look at Marine, I guest that's the part that I felt like last quarter, you guys were maybe the most concerned about, and you obviously did a good job. You're always said you do a good job in a volatile market. So how should I think about kind of the sustainability of what happened there, given that it's a spot business? Is there such a thing as sustainable or --?

It's very difficult to give you, Alex. I mean, this has been the holy grail of World Fuel's conference calls since as far back as I can remember. When you've got a business model which is fundamentally by its nature spot driven, you've got global port arbitrage, you've got credit issues, you've got counter-party issues, you've got quality control, you've got slow steaming -- you've got a lot of things -- global trades, China's imports -- there's just lots of things that impact that.

So our job has always been to have an offering that is robust and adds a lot of value to the sustainable fleets that we think are the large players that are strategically going to survive through every market condition. And we continue to invest in that and that was the strategic move we made several years back and I think it's done very well for us.

So we don't have a lot of ability to predict with precision what that changing landscape looks like from the spot market. What we do know is that to the extent that the large, strategically important fleets are still operating in this market, we will have an important part of those market share. And because we have a very strong footprint, a great global offering, and we tend to be safe harbor in a difficult market. So I feel good about that. I can't give you with precision what sustainability means, again, in a business that's fundamentally spot.

I appreciate that. There's something to be said for a track record; I think you guys have that at this point.

Right. I mean, over the years, this has always been sort of the question. I would just tell you that -- just go back and look at it -- quarter in, quarter out, we've continued to maintain a huge footprint and I think that that's something that a lot of our competitive landscape would not be in a position to say.

So I think this was, again, our strategic decision that Mike and I had a couple of years ago was execute very well, make a very high, robust value-add model, build a global platform that had a lot of discrete domain expertise, add the expertise in derivatives, quality control, operations, and logistics, and you would have something that was important to every major financially viable fleet in the world. So that's what we've done. We've continued to invest in that and I think it's done very well for us.

Okay, thanks for that. Ira, a question for you. I think you said the inventory gain was about the same as last quarter. I'm not sure I know what it was last quarter -- can you give me some help?

Somewhere in the $4 million range.

Okay. And if prices are down now from the average level of last quarter, does that mean I should think about -- that's a negative impact on the third quarter if it stays where it is now?

Remember, it's not simply the raw -- fact that it's down today versus the end of the quarter. It's really the movements, the timing of those movements, during the quarter. So a bit tough to help you and say yes, you could generalize. Because we obviously are hedged, and that $4 million or so really comes from more of significant movements in short periods of time within the quarter.

Fair enough. Thanks for the time, guys.

Thanks.

Kevin Sterling, BB&T Capital Markets.

Thank you, operator. Good afternoon, Paul and Ira.

Hey Kevin, how you doing?

Okay. Paul, let me ask a question a different way. People have been asking you about the economy and I understand it's hard to have any visibility. But maybe let's talk about -- you have a new term loan, you extended your credit facility. What does it mean to have a healthy and transparent balance sheet, in particular dealing with suppliers in an uncertain economic environment?

Our suppliers are actually, I think, very grateful that this Company continues to demonstrate our seriousness as a partnership because we continue to invest and grow our balance sheet. And by making those investments, that's a huge signal to oil companies that are saying, who can I kind of rely on? Who are making the right kind of strategic moves to be a reliable long-term partner for me?

And I would say that that's one of the reasons -- you've heard us talk about this for years -- why we've been so serious about continuing to fortify that balance sheet and represent to our supply partners that we are a tremendously valuable go-to-market channel for them. We drive efficiencies, we de-risk their portfolios, and we allow them to build ratability into their models, which is the way that they actually allow themselves to be viable in a difficult market.

So I would say our supply relationship have never been better. And I think our value proposition is more evident than ever. And it isn't just with integrated majors, it's with independents, it's with state oil companies. You've got a lot of emerging player in this market. You've heard us talk in various calls about the fragmentation -- the Rosneft and the [Loop] Oils and the Gazproms, and you've got state and national oil companies coming into it. They don't have robust global marketing operations, they don't have the credit management internally, they don't have always the logistic or the operational support or the technical and quality control, they're not active in the derivative markets. So for a lot of levels, we represent a very important aggregator for them in terms of accessing market share in the world.

And I would say that that trend is increasing and is more acute in a challenged market. They're more sensitive to the risk and so they look to us more than ever.

So I would say that it's been great. And I would also argue that it validates the importance of why we made the strategic move we did. So as I said in my opening call, strategy's important and we've had a long-term strategy that we would build a platform that was very, very valuable to the global supply community; we've done that. So we just continue to execute on that and I think regardless of what happens to the economy, we're going to be a pretty important fixture in that landscape.

Okay, thank you; I'd agree. Along those lines, do you think smaller players who do not have access to liquidity might be getting squeezed out of the market? You guys -- for a while there, you've been on an acquisition spree. Do you think we'll see the M&A pipeline heat back up as maybe some of the smaller players cry uncle?

I would say -- there are a couple of things. On the competitive landscape, I can't really speak to that. Competition's always going to be there; we don't take it lightly. You always have to be respectful of competition; they're always going to have a role in the market. But I would say certainly when things are as complex, in today's world, it's not easy to play at scale. And that's something that the investments we've made, I think, prove that there's a huge differentiation now in our offering. So I think we feel good about that.

In terms of M&A, again, the very robust sort of business development strategic template that Mike Kasbar has been driving the last couple of years, as you know, has yielded some pretty important results in our ability to execute on acquisitions, to target very good properties, and to bring them into the World Fuel group and integrate them effectively.

I think we also understand the importance of digestion and understanding how to make sure that these things all work, and then we are also pleased to say that just given the investment we've made in our liquidity position and our platform, we continue to see a pretty healthy pipeline of activity just come across the desk that allows us to process and evaluate that.

And of course, it's great to be in this kind of a market in our kind of a strong position because it means we can execute on things that other people are not in a position to execute on because they are more challenged in this environment.

So it is important to have that balance sheet and that liquidity position -- that's part of why we made the moves we did. It's all about being prepared. Mike has always said that luck is when preparation meets opportunity. Well, there's a lot of hard work that goes into that preparation and then you've got to be prepared when the opportunity hits, and I think that's what our strategic focus has been all about, is be prepared and ready to execute when the time is there.

Great. And then Paul, maybe going back to your Marine gross profit, very nice growth this quarter. At first when I looked at that, I thought maybe you guys had kind of went down the risk curve and maybe getting compensated a little more because you're taking on a little more risk. But after hearing you talk, I don't think that's the case. It seems like you're getting paid by your larger customers because of the value-added service you provided. Am I thinking about it the right way?

I would say that we definitely didn't move down the risk curve. In fact, as you know, that's just not been our strategy; that's not where we play. I think that what it is is it's about execution. Again, as an aggregator with a team that understands markets very effectively, it's our ability to work both the supply side very efficiently and bring competitive value to our customers while really understanding what drives market dynamics on the supply side. That execution's what's driving our result, and I would say adds to it some component of perception that we are a better counter party than others. And that probably plays a role as well.

Right; well, thank you. And one last question -- was there any impact on your business from the Japanese earthquake and tsunami?

Actually, perversely -- it's one of these strange things -- I would say that for our Japanese customers there was a huge pressure on the production of local oil because with the nuclear plant being out of commission and then obviously the very -- almost of necessity, they had to do a very fast evaluation of all the other nuclear facilities. That put a lot of pressure on the local production of fuel oils to go into the power supply area, which meant that shipping fleets that historically had lifted bonded product in Japan were now having actually to forego those lifting patterns in Japan and look for more help outside of their Japanese market.

So I would say that if anything, we benefited because at a time when they sort of needed help most, we were there to help them. I went to Japan very soon after the earthquake and spent time with our customers in our office. As you know, relationship is very important and I think at a time of considerable need and a lot of upheaval, we were closer than ever to our customers and we were there to help them at a time when they really were challenged. And I'm pretty pleased about that.

I think that we benefited in that sense, but I would say long term, it's really about helping out -- anybody can be there for a customer when things are good; it's when things are tough that you really get tested. And I would say that that's something that we did very well in Japan and our customers value that and it's a very important long-term market for us.

Right. Well, great. Congratulation and thanks for your time this evening; I really appreciate it.

No problem.

Thank you, Kevin.

Brian Delaney, EnTrust.

Hi, Brian.

Hi, thanks for taking the call. Quick question -- the $60 million in receivables sold in the quarter. Where in the cash flow does that show up? Is that in operating activities, would it be under the receivables purchase agreement?

Yes, it would flow through changes in working capital like normal collection of receivables.

Okay. And what type of recourse, if any, is there under that agreement?

They're sold without recourse.

Okay. So it's in the operating. And then, the comment on the operating expenses came in higher due to higher gross profit dollars. Can you just describe what drove the higher op expense? Is it just (multiple speakers).

Principal, yes. Anything variable tied to GP, and principally that would be compensation more than a lot of other things. Those are modest expenses, too.

And people have asked this a couple of different ways, but when I look at the absolute increase in gross profit dollars this year versus last year, what would be the dollar contribution from acquisitions made subsequent to the end of the June quarter last year? So the cumulative impact in this quarter relative to the businesses that we didn't own last year.

I don't have that number. That's not a number we've shared before and I don't have that number right in front of me so I can't help you with that one at the moment.

And of the $40 million we spent this quarter on acquisitions, did I miss what the impact was on this quarter's results from that acquisition?

No, we didn't share that detail, either. Obviously it's not an overly material number. We just had -- NCS had been already in for on month last quarter, so you only had two incremental quarters of NCS. And then you had Ascent in for the full quarter, but there's some seasonality in that business so that number wasn't overly material, either, in terms of impact on this quarter.

Okay.

Remember, Brian, you have the amortization related to both of those businesses impacting the expense number for the quarter as well, and in NCS's case, as I pointed out when we bought NCS, that number is relatively meaningful. And you could tell by the numbers I shared in my prepared remarks, where amortization was up about $2.1 million sequentially, which is principally related to NCS.

Right. When I look at it -- am I looking at it correctly -- so we spent $100 cumulatively on acquisitions. It looks like about half of that went to good will, which is not being amortized, right?

I don't know if the number's exactly half, but you're probably in the ballpark. There's a meaningful piece that is not amortized, and then in NCS's case there's a more meaningful piece that is amortized. So I don't know if it balances out to about 50% or not; it's pretty close to 50%.

Okay. And then just conceptually -- I mean, you talk about your supply partners, you help de-risk their portfolios. When I look at the reserves you have, $22 million on nearly $2 billion in receivables, that implies a very low risk profile -- $2 billion in receivables. Or if I even look at -- a couple of not with the type of spreads that you guys are making -- it seems it's fairly low risk according to the reserves you guys have against the receivables, yet it's a fairly high return when I think about the type of spreads you're generating on those receivables.

What do you guys do to make sure that when people see that type of return it doesn't just drive more competition into the space?

I'll take a shot at that, Brian; it's a great question. I would say that over the years plenty of people have said, gee, wouldn't it be easy to just wander into the international fuel markets and set up robust service offerings in multiple supply venues around the world and deal with hundreds of different counter parties in remote locations and then distill all that into a value proposition that can service customers that are also in the thousands? Not so easy to do.

Over the years, we've seen lots of people sort of wander into the space and wander right back out. It took us years to build our enterprise. So we're always -- we're not casual about that, we're not cavalier, but I would say that the threshold's not so easy. We make it look easy, but I'll tell you, a lot of art goes into working that risk management discipline. And it is not (inaudible). So I would say, as Ira alluded to, we've got 75, almost 80, professionals around the world who do nothing but focus on that and I don't think anybody does it as well as we do, but it is -- we've made it look easy; it is not easy. So I would say that most of the interlopers who kind of wander into the space casually find that that's not so easy to do.

Well, perhaps just from the perspective of your suppliers, then. When I look at this it seems as though there's -- you're saying there's really -- it might be difficult, but there's not a lot of underlying risk given the type of reserves we have against a meaningful receivable.

Yes, to go back to that question -- do we think that we're adequately reserved? Absolutely. And if you look at the history of write-offs, I think the record's pretty good. So I would say that that's the best way to look at it -- how well has World Fuels done over a sustained period of time, meaning the last 15 years, on how well we've done with write-offs? And I would say that that's a pretty damn good track record.

You may also remember, too -- and this is sort of a level of minutia that we forget from time to time -- who's up to speed. But remember, in the maritime space, there was always an underlying maritime lien. So not that that's a silver bullet, but it was a component in our ability to navigate risk in the marine space. So No. 1, strategically you're focused on a high class of customer. 2, that there's an underlying maritime lien so that in some circumstances, your ability to actually protect your best -- your receivable has to do with being able to seize the collateral to pay that. So there's been a lot of factors that go into it.

But I would say that over the duration, the biggest testimony to our ability to execute well is look at all the variability in markets -- good markets, bad markets, up, down, 2008, the financial meltdown, 60 airlines going bankrupt in 2008, yada yada yada. And throughout all of that, we've continued to execute very, very well. So does that mean that it's easy for people to get in? I wouldn't say that at all.

I appreciate that. Last question -- what does the acquisition landscape look like currently?

We don't talk about acquisition specifics, but I would just say that, as a general proposition, again, as I alluded to earlier, over the last couple of years, Mike's been driving a very robust sort of strategic template that's allowed us to process and qualify more opportunities than we've ever been able to do in the past. And obviously, our success is sort of the word is out that we do this well, that we integrate well, and that we're good buyers.

I think that we're perceived as basically an entrepreneurial-driven company. Mike and I were entrepreneurs so we're kind of kindred spirits. This isn't some sort of anonymous corporate enterprise that comes in and acquires. We tend to be a lot like the people we're buying so that is a real benefit.

So it's all about the returns and thinking about what fits strategically. But what's nice is to have a pipeline of being able to continue to qualify opportunities, and that's good.

And being in a position to execute.

When you guys start generating free cash flow, is the priority always going to be acquisitions? Where would share repurchases be in the hierarchy of your uses of all this free cash flow?

Well down below organic investments and strategic investments. Those would certainly come first and there are plenty of those opportunities left. The day that those run out, we may more seriously consider something like a buy-back.

Okay. Thank you very much, guys.

Thanks.

Edward Hemmelgarn, Shaker Investments.

Hi, Ed.

How you doing? Great quarter again, Paul. Just a couple of questions. One is regarding the Land segment. Can you talk a little bit about your organic growth opportunities there? I mean, as opposed to acquisition-oriented.

And then second, also as you've been able to enhance the gross profit per gallon sold on the line. I know you said some of that is clearly coming from your overall profitability just from size and being able to amortize some of the fixed costs a little bit better. What other kind of value-added features do you anticipate you might be able to start offering that also will enhance the profit picture?

Hi Ed, it's Mike Kasbar. On the Land organic side, as we expand the volume and the geography of the operations and the talent pool that we're fortunate to pick up with our acquisitions -- and we've selected, I think, very well in terms of those companies that we've picked up -- we've got reasonable opportunities to continue to grow that. So we've seen that in terms of bolt-ons, recruiting individuals to come into the space in terms of the different locations.

And then some of the value-add that we have in terms of the technology platform that we're building within that space -- bringing on some of the synergies that we've got from some of our other segments gives us a continuing opportunity to grow. There was a question previously in terms of what are the returns between the various different businesses? And we really do like the strategy of being in the various different spaces. We do get leverage from the corporate side where we're moving various skill sets and products and different moves. Certainly our risk team straddles across all the businesses.

So the opportunities increase as we grow. You see the size of that now -- we're at about a 2-billion-gallon clip so it's starting to look similar to what we have in our Aviation side -- 50% of that volume. So the opportunities expand as we continue to grow. So there are good organic growth possibilities; we've seen some of them. And we do have additional value-add as we continue to add businesses and different skill sets in people and technology.

You've made -- I think in the past you've mentioned start-up operations, or foundations in, like, places like England and also in Brazil, in areas outside the US. How's the progress outside the US?

Well, de novo is -- we've done this all our lives. It's certainly a high-protein activity. If you've got the right folks you can get the job done. We've got a lot of passionate people that are driving those initiatives. And we are definitely making progress. There's a good amount of investment. We started out our US-line business de novo, and that led us to growing the footprint and some interesting acquisitions. We'll probably go the same route in those countries and be involved in some other countries.

It's a global business. It's not international; obviously, it's regional. But we are taking that same skill set that we have in the US and Brazil and the UK and leveraging that within those various geographies.

Okay, thanks.

Thanks, Edward.

At this time, there are no audio questions.

Thank you, operator; thank you, everybody for joining us and we'll look forward to talking to you in Q3. We appreciate it.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation; you may now disconnect.